Clary Hood, Inc. v. Commissioner, T.C. Memo. 2022-15, aff’d in relevant part (4th Cir. 2023), has become the modern reference point for how federal courts evaluate reasonable compensation disputes — and, just as importantly, how they evaluate the experts who testify in them. The case involved a South Carolina land-grading company that paid its founder-CEO roughly $5 million in each of two tax years. The IRS challenged the deduction as excessive under IRC §162(a)(1); the Tax Court allowed substantially more than the Service wanted but less than the taxpayer claimed, and sustained an accuracy-related penalty for one of the two years.

Read closely, the opinion is less about the dollar figures than about methodology. Both sides retained compensation experts, and the court’s treatment of them offers four lessons for any attorney or CPA preparing a compensation dispute.

1. Comparability is the whole ballgame

The Tax Court determines reasonableness by comparing the disputed pay to compensation for comparable positions at comparable companies — and the experts’ comparability choices drew the court’s closest scrutiny. The credited analysis selected survey data for contractors with revenues and assets similar to the taxpayer and examined officer compensation as a percentage of revenue. The discounted analysis rested on what the court saw as dubious assumptions — treating a private regional contractor as comparable to publicly traded national construction firms. An expert who cannot defend the comparator set factor by factor loses the court before reaching a conclusion.

2. Catch-up compensation is a real doctrine — if it’s documented

Notably, the IRS’s own expert agreed the CEO had been undercompensated in earlier years and that some current-year “catch-up” pay was reasonable, proposing a method to separate current compensation from make-up amounts. The doctrine is well established, but it works only when under-compensation in the earlier years is provable — contemporaneous records, board minutes, and market data from those years. It is a reconstruction exercise, and the quality of the reconstruction decides its weight.

3. The witness must own the report

One of the sharper lessons: the taxpayer’s testifying economist admitted that a co-author had done most of the work and was more familiar with the report’s contents, and he was unable to supply missing comparable-salary data on cross-examination. Under Tax Court rules the expert report serves as direct testimony — so a witness who cannot defend every input is a liability, not an asset. When retaining an expert, confirm the person who signs the report is the person who did the analysis and will sit for cross.

4. The “hired gun” label is fatal — and earned

The Tax Court will likely reject opinions that appear to start from the premise that the compensation was reasonable and tailor the analysis to fit; selecting data to justify a desired result brands an expert as a hired gun. A neutral analysis that concedes unhelpful facts and still supports the taxpayer in substantial part is more persuasive than one that sides with the client on everything. Independence is not a courtesy — it is the mechanism by which the opinion acquires evidentiary weight.

What this means before your dispute reaches a courtroom

Most reasonable compensation controversies are resolved at examination or Appeals, where the same principles apply with lower stakes: documented comparability, defensible methodology, and an analyst who will stand behind the work. Engaging the expert early — ideally when compensation is set, via an opinion letter or study, or at the first examination notice for S corporation and closely held company matters — preserves options that disappear once positions harden.

Grahall’s consultants provide independent reasonable compensation analysis, reports, and testimony nationwide. For engagement mechanics and deliverables, see how counsel retain us, or request a conflicts check — party names only, nothing confidential.

This article is general commentary on a published decision, not legal or tax advice for any specific matter.